Planning Regulations: Two Tests to Determine if We Have Confused the Cure With the Disease

Previous empirical research has demonstrated that indexes of urban planning restrictions are associated with higher housing prices. Some argue that this relation is caused by a decrease in the supply of housing compared to a laissez-faire city. Alternatively, hedonic estimates finding positive effects of sunlight, lower density, and clean air suggest that price increases could be caused by an increase in the attractiveness of a planned environment. This paper demonstrates theoretically that, in the presence of building density externalities, both arguments could be correct, but that the welfare effects of land use planning cannot be determined by the relation between housing prices and regulation. Two alternative tests are conducted here. First, amenity effects are examined using a Rosen-Roback test. Second, recently available measures of aggregate land value are used in a new test. The Rosen-Roback test results indicate that the house price effects of planning result in a compensating increase in urban amenity. The aggregate land value test, performed for the first time in this paper, finds that the relation between historical patterns of planning regulation and current aggregate land value is positive, consistent with the hypothesis that planning can be a welfare-enhancing remedy for problems of overbuilding under laissez-faire land development.